Does Labour have the political will to introduce contributory welfare?

Creating the 'something for something' system politicians are so keen on would require more zeal than Beveridge ever had

A long-term unemployed man with his employment coach attends a work programme in Hull. ‘Contributory welfare is a two-tier system in which those who haven’t paid in must rely on less generous means-tested support.’ Photograph: Christopher Thomond Christopher Thomond/PR

It's easy to see where the pressure for contributory welfare is coming from. jobseeker's allowance overwhelmingly goes to people who spend most of their time in work, according to recent government analysis. Among typical adult claimants, four in 10 have no history of having claimed for unemployment benefits in recent years. When the shock of unemployment hits, average earners find a meagre benefits system that offers them some of the least generous support in the OECD. At the same time a small minority of claimants with long or frequent spells on JSA appear to get the same benefits as everyone else, without having contributed.

Our flat-rate system of unemployment support appears to offer "something for nothing" for some, while those who've played by the rules get very little back. Uniform benefit levels inevitably mean lowest common denominator entitlements. With job insecurity at a 20-year high, workers increasingly want to know that there's something in it for them.

Back in 1942, William Beveridge understood all this. "Benefits in return for contributions, rather than free allowances from the state, is what the people of Britain desire," he wrote. But ever since the euphoria that accompanied the launch of his famous report, efforts to recognise contributors with a better benefits deal have failed to take hold in Britain. The result is today's politically toxic system and an unremittingly negative debate about "scroungers". Collective contributory welfare might offer an answer. But if any party is to make it work for the 21st century, it needs a plan to overcome three big hurdles at which past efforts have fallen.

The first challenge is to exclude non-contributors. Tough though it may be, contributory welfare is, by definition, a two-tier system in which those who haven't paid in must rely on less generous means-tested support. The simplest approach would offer a flat-rate top-up to the standard adult JSA rate of £71.70 per week for people with a contribution record.

That raises the question of how to draw the line between those who are and are not eligible for the higher rate. Past Labour policymakers have instinctively sought to make the system inclusive, recognising the non-financial contribution of carers, mothers and other people with patchy work histories.

But for all the good intentions, history shows us how this story goes. However justifiable it might be to include people who have contributed in non-financial ways, their entitlement to more generous benefits inevitably entails a financial redistribution. That undermines an important principle of any sustainable insurance scheme: that it cannot sustain systematic redistribution from some participants to others without the net contributors seeking to leave. Hence political support for the scheme ebbs away. And support grows for the Conservative vision of transforming welfare into a safety-net by limiting entitlements and extending means-testing to target spending only on the poorest.

The lesson is that an enduring contributory welfare system means restricting more generous entitlements to those who have very clearly paid in. Instincts deep within their parties mean that past Labour and Conservative governments have ultimately both been enemies of the contributory principle.

The second challenge is to establish a close relationship between what people pay in and what they can expect to get out. Social security systems are more than private insurance policies. They reflect people's desires for a degree of social solidarity, which creates some tolerance for less fortunate people getting slightly more out than they paid in. But there is a limit to that tolerance. The goal of redistribution is different from that of unemployment insurance, and efforts by policymakers to fudge the distinction within what purports to be a contributory system drains its political support.

A flat-rate top-up therefore fails the test for a sustainable system: higher earners will have little affection for a system that gives them far less than they are likely to have to pay in. International evidence bears this out. While the UK's flat-rate contributory entitlements have withered, from Denmark to the US, systems where benefits are related to prior earnings have proven far more resilient.

Finally, if contributory welfare is to take root, policymakers must design a system to keep the Treasury's hands off the money. From the very early days, national insurance was thought of by the Treasury as a more politically acceptable form of taxation. Successive postwar reforms ratcheted up contributions in return for a promise of more generous future benefits. And while the entitlements were subsequently cut during periodic bouts of fiscal belt-tightening, the higher contributions remained, which the Revenue spent on other things or handed back in tax cuts.

German and French unemployment benefits have avoided this fate because they have self-funding schemes that are separate from their finance ministries. When public spending cuts are needed to balance the books, finance ministers cannot take the axe to an independent insurance scheme.

In 1974, reflecting on Barbara Castle's plans to introduce the state earnings-related pension scheme, the permanent secretary for social security wryly noted: "We are going to design a new plane from the models that have crashed on the runway." His jaundiced view about the prognosis for rejuvenating the contributory principle proved prescient. In the wake of the fiscal crisis of the late 70s, entitlements were rapidly eroded.

Forty years on, the idea is once again in the ascendant and a groundswell against means-testing is growing. We now know what it would take to make contributory welfare fly. If the next reform is to avoid the fate of past ones in becoming a footnote in the history of the welfare state, it will entail a profound overhaul of the way our benefits system works. That is a far more ambitious goal than anything Beveridge achieved on benefits. And it will require the political will to match.